Commercial real estate space is a significant investment and commitment. If you’re an investor or looking for off-market commercial real estate space, it’s important to know what you are leasing before creating rent amounts in a lease. After all the due diligence and property owner background you have collected, it’s crucial to ensure you understand the usable vs. rentable square footage you will be dealing with.
There are multiple types of per square foot space in a commercial real estate lease to understand. You have the rentable square footage (RSF) and usable square footage (USF)… It’s all in the details. While both are important, your calculations for rent cost or income per square foot need to make a clear distinction between both.
USABLE SQUARE FOOTAGE. WHAT IS IT?
The total square footage of any commercial real estate property is the usable square footage of space that a tenant can occupy. In some cases, the size of space compared to the overall space in a building will further expand the definition of usable space.
FULL FLOOR VERSUS PARTIAL FLOOR USABLE SPACE
When a landlord leases commercial space, there are advantages to dividing the space to allow for multiple tenants. This division will determine the usable space calculations and areas each tenant can occupy.
In a partial floor commercial lease, the usable space includes all office space, storage areas, self-contained restrooms, entryways, and internal fixtures.
A full-floor commercial lease includes all usable square feet enclosed by the boundaries of the floor. This lease contains space that is not always usable for conducting business. These include-
- Mechanical areas such as communication rooms and electrical access areas
- Closets for cleaning and janitorial
- Storage areas
- Common areas such as elevator and receptions areas, kitchens, hallways, and common areas
In most cases, some building square footage dedicated to elevator shafts and stairwells is not included in the usable square footage calculations.
RENTABLE SQUARE FOOTAGE
The second area of space for commercial leases is the RSF (rentable square feet). This space is- all usable square feet plus a dedicated portion of the common areas in a building.
These common areas include hallways, lobbies, public or nonprivate bathrooms, loading and storage areas, and even athletic areas. The RSF is how the base property rent is determined and is why it’s essential to understand exactly what this area is.
A typical commercial lease will calculate a prorated portion of the overall square footage and assign it to the tenant lease. For example, if a lease is for 5,000 SF in a 50,000 SF property, this lease has10% of the property’s common space in it.
CALCULATING THE NUMBERS
When calculating expenses and or revenues, know that rents are not related to usable square feet but are calculated using the rentable square feet. Remember, rentable space is typically more than usable; use the RSF for all rent calculations.
The landlord tool that defines the distinction between the property’s RSF and USF is the load factor (LF). To calculate a property load factor, divide the building’s total rentable square feet by the total usable square feet. The formula is:
LF= Total Rentable SF/ Total Usable SF
Using the LF multiplied by a lease’s usable square feet determined the RSF space. The formula is:
Lease USF x LF= RSF
Understanding the LF helps commercial real estate landlords in unique ways. The LF ensures the landlord charges a rent rate that accounts for both RSF and USF, ensuring the rate per sq ft covers all areas of the property. As an example, you have a property containing 50,000 RSF and 40,000 USF for lease.
In the property example above, dividing the RSF by the USF, your LF = 1.25. Your lease would detail the LF as a percentage of the common area to market this space correctly.
A commercial space with 5,000 USF would have a rental calculation as follows:
5,000USF x1.25= 6,250 x rental rate per sq ft.
GROSS SQUARE FOOTAGE
While not important for a tenant unless the lease is for an entire building, a landlord or investor knowing the gross square foot of the property knows precisely what they have. This GSF or gross area of your property is the total square footage of everything. It includes all usable and rentable square footage. Usual exclusions to this GSF include:
- Outdoor parking lots
- Truck loading zones
- Exterior lighting wells
- Athletic areas
Taking the Measure of Your Investment
Get the space measured before investing. A good tip is to maximize your investment with modern measuring tools as an investor. Using today’s laser measurement devices will ensure you have captured the exact space sizes. Don’t rely on others’ antiquated measuring devices. With solid space numbers, the new leases can generate increased rent rolls.
When measuring space for leases, a standardized process is the best option. One way to do this is to use The Building Owners and Managers Association (BOMA) standards for measuring commercial buildings’ lease space. BOMA has two standard measurement methods:
- Method B: The Single Load Factor Method calculates the rentable space for each tenant using a standard approach to measure floor area. All floors on a building keep this standard.
- Legacy Method A: The 1996 standard uses separate prices for the USF and common square footage
Leasing by the Numbers Benefits
A landlord who knows their exact rentable square footage, usable square footage, and load factor is ready to rent their space. Marketing the space using the RSF is the best option. However, detailing the usable square feet to potential tenant ensures there is no misunderstanding of what you’re charging for and what the tenant is paying for. The best way to maximize the rental rate and increase space utilization is by leasing with the RSF.
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